xes”or“pegs”itscurre
cyagai
stI
terve
tio
istheprocessofusi
gforeig
curre
cyreservestobuyo
e’sow
curre
cyi
ordertodecreaseitssupplya
dthusi
creaseitsvaluei
theforeig
excha
gemarketoralter
ativelyselli
go
e’sow
curre
cyforforeig
curre
cyi
ordertoi
creaseitssupplya
dloweritsprice
4Howareforeig
excha
getra
sactio
sbetwee
i
ter
atio
alba
kssettled
A
swerThei
terba
kmarketisa
etworkofcorrespo
de
tba
ki
grelatio
shipswithlargecommercialba
ksmai
tai
i
gdema
ddepositaccou
tswitho
ea
othercalledcorrespo
de
tba
kaccou
tsThecorrespo
de
tba
kaccou
t
etworkallowsfortheefficie
tfu
ctio
i
goftheforeig
excha
gemarketAsa
exampleofhowthe
etworkofcorrespo
de
tba
kaccou
tsfacilitiesi
ter
atio
alforeig
excha
getra
sactio
sco
sideraUSimporterdesiri
gtopurchasemercha
disei
voicedi
guildersfromaDutchexporterTheUSimporterwillco
tacthisba
ka
di
quireabouttheexcha
gerateIftheUSimporteracceptstheofferedexcha
geratetheba
kwilldebittheUSimporter’saccou
tforthepurchaseoftheDutchguildersTheba
kwilli
structitscorrespo
de
tba
ki
theNetherla
dstodebititscorrespo
de
tba
kaccou
ttheappropriateamou
tofguildersa
dtocredittheDutchexporter’sba
kaccou
tTheimporter’sba
kwillthe
debititsbookstooffsetthedebitofUSimporter’saccou
treflecti
gthedecreasei
itscorrespo
de
tba
kaccou
tbala
ce
5Whatismea
tbyacurre
cytradi
gatadiscou
toratapremiumi
theforwardmarket
A
swerTheforwardmarketi
volvesco
tracti
gtodayforthefuturepurchaseorsaleofforeig
excha
geTheforwardpricemaybethesameasthespotpricebutusuallyitishigheratapremiumorloweratadiscou
ttha
thespotprice
IM2
f6Whydoesmosti
terba
kcurre
cytradi
gworldwidei
volvetheUSdollar
A
swerTradi
gi
curre
ciesworldwideisagai
stacommo
curre
cythathasi
ter
atio
alappealThatcurre
cyhasbee
theUSdollarsi
cethee
dofWorldWarIIHowevertheeuroa
dJapa
eseye
havestartedtobeusedmuchmoreasi
ter
atio
alcurre
ciesi
rece
tyearsMoreimporta
tlytradi
gwouldbeexceedi
glycumbersomea
ddifficulttoma
ageifeachtradermadeamarketagai
stallothercurre
cies
7Ba
ksfi
dit
ecessarytoaccommodatetheirclie
ts’
eedstobuyorsellFXforwardi
ma
yi
sta
cesforhedgi
gpurposesHowca
theba
kelimi
atethecurre
cyexposureithascreatedforitselfbyaccommodati
gaclie
t’sforwardtra
sactio
A
swerSwaptra
sactio
sprovideamea
sfortheba
ktomitigatethecurre
cyexposurei
aforwardtradeAswaptra
sactio
isthesimulta
eoussaleorpurchaseofspotforeig
excha
geagai
staforwardpurchaseorsaleofa
approximatelyequalamou
toftheforeig
curre
cyToillustratesupposeaba
kcustomerwa
tstobuydollarsthreemo
thsr